To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Freshpet (NASDAQ:FRPT) so let's look a bit deeper.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Freshpet, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.024 = US$36m ÷ (US$1.6b - US$83m) (Based on the trailing twelve months to March 2025).

So, Freshpet has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

View our latest analysis for Freshpet

In the above chart we have measured Freshpet's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Freshpet for free.

So How Is Freshpet's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 2.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 279%. So we're very much inspired by what we're seeing at Freshpet thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Freshpet is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 21% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Freshpet does have some risks though, and we've spotted 1 warning sign for Freshpet that you might be interested in.

While Freshpet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.